Macro Theme:

 

 

Short Term SPX Resistance: 4,969 (SPY 495)

Short Term SPX Support: 4,920 (SPY 420)

SPX Risk Pivot Level: 4,900

Major SPX Range High/Resistance: 5,000

Major SPX Range Low/Support: 4,800

‣ Volatility should continue to contract into 2/14 VIX expiration – 2/16 equity expiration. Major downside “risk-off” occurs on a break of 4,900, which is our first major support. 5,000 is major resistance.*

*updated 2/7

 

 

Founder’s Note:

ES Futures are flat to 4,973. NQ futures are flat at 17,655.

Key SG levels for the SPX are:

• Support: 4,920, 4,900
• Resistance: 4,969, 4,973, 5,000
• 1 Day Implied Range: 0.65%

For QQQ:

• Support: 425, 420
• Resistance: 430, 440

  Call Wall

IWM:

• Support: 190, 187
• Resistance: 194, 200

  Call Wall

Major indicies are doing nothing, tied down by increasing gamma around at-the-money strikes, which is zapping realized volatility. That, in turn, has triggered a draining of implied volatility. Lower implieds further supports indicies – this is positive vanna drift. We anticipate tight trading ranges to persist into next weeks VIX expiration (Wednesday), and/or a break of 4,900 (or primary risk-off level). There are large positions up at the 5,000 SPX strike, which should serve as primary pinning resistance into next week.

We can see the declining IV in the 13.03 VIX which is at multi-week lows, but also in skew metrics like VVIX/SDEX. These drops, like in the VVIX, below, suggest that demand for tail risk is draining off.

As volatility contracts, the room for short-volatility “error” increases, as traders price in persistently tighter ranges. Recently, whenever there is a small volatility spasm put/vol sellers step up to catch equity markets. Eventually a trigger arrives to force those sellers to run for cover, but the timing of that trigger is elusive. OPEX is a natural area for increased volatility/market movement due to shifts in large options positions, but we also watch credit-related events like NYCB. While we don’t have an opinion on this case, it is a possible source for long put protection.

Regardless, the SPX should be well supported while >=4,900, however under that level we believe demand for long puts/long volatility could increase. Because IV’s are so low, the risk of jumps in volatility are higher, as IV has farther to travel to price in higher volatility.

 

 

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